February 8, 2023

Volume XIII, Number 39


February 07, 2023

Subscribe to Latest Legal News and Analysis

February 06, 2023

Subscribe to Latest Legal News and Analysis

SEC Targets AML as Exam Priority

Yesterday, the SEC Office of Compliance Inspections and Examinations (OCIE) announced its 2018 examination priorities, released in order to “improve compliance, prevent fraud, monitor risk, and inform policy.”  OCIE announced five priorities, with Anti-Money Laundering (“AML”) programs being one of them.  This emphasis on AML is consistent with the SEC’s increasing willingness to bring enforcement actions relating to AML and the Bank Secrecy Act (“BSA”).

OCIE conducts the SEC’s National Exam Program (NEP) whose mission is to protect investors, ensure market integrity and support responsible capital formation through risk-focused strategies that: (1) improve compliance; (2) prevent fraud; (3) monitor risk; and (4) inform policy. The results of the NEP’s examinations are used by the SEC to inform rule-making initiatives, identify and monitor risks, improve industry practices and pursue misconduct.  OCIE is responsible for conducting examination on broker-dealers, investment advisers, transfer agents, and other SEC-regulated entities.

OCIE developed these priorities based on feedback from financial professionals, market participants, and attorneys regarding compliance challenges, recent trends, and high risk areas. SEC Chairman Jay Clayton noted that this year the priorities were directed at “asset verification, market infrastructure, and duties owed to retail investors.”  OCIE Director Pete Driscoll reiterated those sentiments, stating that the risk-based strategy this year prioritized “the interests of retail investors and examined the aspects of securities firms that pose risks to investors and the functioning of the capital markets.”   Another priority announced by OCIE is cybersecurity.

Scrutiny of AML Programs

Under the BSA, some securities firms regulated by the SEC, such as broker-dealers and mutual funds, are required to establish AML programs which identify their customers, perform customer due diligence, and monitor accounts for suspicious activity. These firms are required to file Suspicious Activity Reports (“SARs”) with the Financial Crimes Enforcement Network (“FinCEN”) when suspicious activity is noted.  OCIE highlighted the important role SARs play for law enforcements efforts to combat terrorist financing, organized crime, and public corruption.  For these reasons, OCIE stated “ensuring financial institutions meet their AML program obligations is an important and critical task for financial regulators.”

OCIE will focus resources on examining whether firms are adapting their AML programs to address these obligations, by specifically assessing: (1) whether firms are taking reasonable steps to understand the nature and purpose of customer relationships under FinCEN’s new customer due diligence rule (about which we have blogged; and properly address those risks, (2) whether firms are timely and accurately filing SARs, and (3) whether entities are conducting robust independent testing of their AML programs.

Indeed, the SEC has become increasingly interested in broker-dealer compliance with AML laws and regulations. In January of last year, the SEC created a research guide or a source tool to assist broker-dealers in their compliance efforts.  The source tool walks through the basic statutes and regulations governing AML program compliance and lays out guidance and resources issued by self-regulatory bodies, such as FINRA addressing compliance.  The SEC made good on their promise later in the year, as we have previously written about here and here, and filed suit against a broker-dealer which routinely and systematically failed to file SARs and omitted key information in the SARs that were filed such as the criminal and regulatory history of customers.

The SEC continues to aggressively pursue enforcement of the AML compliance obligations of the firms it regulates and has recovered fines in the 7 and 8 digits. Given the reiteration of its priorities, we believe 2018 will see a continued effort by the SEC to ensure AML compliance of its regulated entities.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 39

About this Author

David Axelrod Investigation Lawyer Philadelphia Ballard Spahr

David L. Axelrod is a former Supervisory Trial Counsel at the U.S. Securities and Exchange Commission's (SEC) Philadelphia Regional Office and a former federal prosecutor. At the SEC, he directed all aspects of litigation—leading complex, multi-agency investigations into a range of alleged securities law violations and serving as lead trial counsel in high-profile federal cases. He also led nationwide insider trading training for SEC enforcement staff.

Mr. Axelrod's practice focuses on representing companies and individuals under investigation by government agencies, including the U...

Priya Roy, Attorney, Ballard Spahr

Ms. Roy focuses her practice on white collar defense, regulatory compliance and complex civil litigation. She conducts internal investigations and advises and defends companies and individuals facing criminal and civil investigation, and has participated in negotiations with the U.S. Department of Justice and federal regulatory authorities. Ms. Roy's practice includes counseling clients in Anti-Money Laundering and Bank Secrecy Act matters, as well as matters involving allegations of tax fraud, violations of the False Claims Act and Anti-Kickback Statute, violations of...